HSPLANT guided for flat but firm CPO price of RM4,000/MT and easier production cost which correspond with our assumptions. We maintain our forecasts but raise our FY24-25F NDPS forecasts from 7 sen to 8 sen. We maintain our TP of RM2.00 and MARKET PERFORM call.

We came away from HSPLANT’s results briefing feeling assured after the following key takeaways were addressed:

1. FY24 CPO prices to stay flat but firm at around RM4,000/MT. The group guided for slightly firmer QoQ CPO prices in 2Q due to short dated 1-2 months forward sales.

However, for the full year, HSPLANT is still expecting CPO prices to hover around RM4,000/MT which is in line with our CY24-25 CPO estimates. Therefore, no change to our CPO price assumptions.

Note that our sector CPO price expectation of RM3,800/MT for CY24-25 is at discount to HSPLANT’s prices because, historically, the group’s RSPO-certified palm oil enjoys better prices over the sector average.

2. Still expecting FFB to grow YoY. The group continues to guide for 0.7m MT FFB output for the full year FY24, a 10% YoY increase in production on improving crop or yields cycle. However, we are more comfortable with a lower FFB output; hence, leaving our estimates of 0.67m MT for FY24 and 0.7m MT in FY25 intact.

3. Easier production cost likely. Compared to CPO production cost of RM2,562 per MT in FY23, HSPLANT expects production cost to dip to RM2,200 per MT if FFB output can reach 0.7m MT with fertiliser costs expected to nearly halve, from around RM2,700 per MT in FY23 to RM1,400 per MT in FY24.

4. 60%-70% dividend pay-out likely to stay for FY24-25. Having closed March 2024 with RM471m in net cash, HSPLANT is expected to continue paying out around 60%-70% of its basic EPS as dividends. Over the past 10 years, the group has been paying out 46% to 81% (65% on average) of its EPS as dividends. As such, given our respective core EPS of 12.8 sen and 13.1 sen, we are nudging up FY24-25 NDPS from 7 sen to 8 sen.

Forecasts. No change.

Valuations. TP is also kept unchanged at RM2.00 using the same valuation basis of 16x forward PER, being the 6-month average for smaller plantation companies. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). However, we have raised our annual NDPS from 7 sen to 8 sen for FY24-25.

Investment case. The long-term investment case for HSPLANT is one of defensiveness namely: (i) a highly cash-generative upstream-centric oil palm operations, (ii) solid net cash position, and (iii) decent dividend track record and higher dividend payout cannot be ruled out given the growing cash holding. Maintain MARKET PERFORM.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues; (ii) impact of weather and labour shortages on production, (iii) weak CPO and PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 31 May 2024